RBI sanctions universal bank tag to AU Small Finance Bank

RBI sanctions universal bank tag to AU Small Finance Bank

It will expand the entity’s product reach and lending base

The Reserve Bank of India (RBI) has approved the AU Small Finance Bank (SFB) to transition into a universal bank. The consent, which came after 11 years, makes AU the first SFB to get such a regulatory acceptance.

Sanjay Agarwal, MD & CEO, AU SFB, remarked, “This in-principle approval acknowledges not just our ability to grow, but to grow responsibly. It is a testament to AU’s strength in reaching widely, integrity in serving wisely, and resilience to shine across economic cycles.”

AU is the country’s largest small finance bank with Rs.2.40 trillion of business. Among SFBs, it commands a 40 percent market share.

In eight years, its loan book rose from Rs.13,413 crore (FY 2018), to Rs.1.09 trillion, while deposits went up from Rs.7,923 crore to Rs.1.24 trillion.

In April 2024, the RBI laid the norms for voluntary transition path fo small finance banks to become universal banks.

AU met the eligibility criteria and applied for the conversion in September.

Meanwhile, Ujjivan SFB and Jana SFB have also applied for such a conversion and their applications are pending.

In a statement, AU acknowledged, “This regulatory approval is a strong validation of AU’s robust business model, sound governance, and enduring commitment to financial inclusion. More importantly, it affirms AU’s evolution into a complete bank, one that offers a full spectrum of banking products and services.”

AU’s journey began in 1996 when Sanjay Agarwal ventured into entrepreneurship in Jaipur, Rajasthan as a vehicle financing company. The underserved segment was later transformed into a non-banking finance company - AU Financiers.

AU was the first batch of 10 entities to receive SFB license in 2015 and started as a small finance bank in 2017, along with another entity, Capital Local Area Bank. The other eight entities were microfinance institutions.

In April 2024, AU acquired a Bengaluru-based SFB, Fincare, a first in the SFB space. However, despite the acquisition, AU’s microloan book was less than 10 percent.

At a time when the microfinance sector is facing multiple headwinds, a relatively smaller book augurs well for the to-be universal bank.

Commenting on the development, an analyst said, “What has worked in AU SFB’s favour is its scale and the relatively low share of unsecured loans in its portfolio. The most significant change will be the removal of the SFB tag, which will enable AU to lower its deposit costs. This will allow the bank to operate in less risky asset classes, contributing to more stable profitability.”

SFBs had to lend 60 percent of their loan to the priority sector, which was 75 percent till the last financial year. AU’s PSL loans were 80 percent. As for universal banks, the mandate is 40 percent. This free up funds for AU could now be deployed in the mid-corporate lending segment, earning attractive yields up to 12 percent.

The analyst added, “With the SFB status no longer applicable, the priority sector lending (PSL) requirement will be reduced to 40 percent, giving AU the flexibility to sell surplus PSL certificates.”

AU will now be able to service corporate clients and offer wider financial services. The transition opens a host of opportunities for it across both retail and corporate segments.

In 2014, RBI had granted in-principle approval to Bandhan Bank and IDFC Bank (now IDFC First Bank) to operate as a universal bank.